Accounting Ch.16 Quiz

At December 31, 2021, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2021. Net income for the year ended December 31, 2021, was $1,700,000. What should be Hancock's 2021 earnings per common share, rounded to the nearest penny? a. $36 b. $4.25 c. $4.00 d. $3.78

c. $4.00 Earnings are $1,700,000 Number of shares shall be 400,000 + 100,000 x 3/12 Number of shares shall be 425,000 Earnings per share shall be $1,700,000/ 425,000 = $4.00

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share b. are added, net of tax, to the numerator of the calculation for diluted earnings per share. c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock. d. are not used to calculate the number of common shared repurchased at the average market price, when computing diluted earnings per share.

a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the a. beginning of the earliest period reported (or at time of issuance, if later) b. beginning of the earliest period reported (regardless of time of issuance) c. middle of the earliest period reported (regardless of time of issuance) d. ending of the earliest period reported (regardless of time of issuance)

a. beginning of the earliest period reported (or at time of issuance, if later)

If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year. a. true b. false

a. true

If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. a. true b. false

a. true

When a company has a complex capital structure, it must report both basic and diluted earnings per share. a. true b. false

a. true

[Diluted EPS, Convertible Preferred Stock]At December 31, 2020, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2021, Sager paid $1,200,000 cash dividends on the common stock and $800,000 cash dividends on the preferred stock. Net income for 2021 was $6,800,000 and the income tax rate was 40%. The diluted earnings per share for 2021 is (rounded to the nearest penny) a. $2.48 b. $3.49 c. $5.00 d. $5.66

b. $3.49 = 6800000/(1200000 + 75000) = 6800000/1950000 = 3.49

Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is a. 851,000 b. 872,000 c. 893,000 d. 914,000

b. 872,000 1 Jan shares 800,000=800000 x 12/12 1 May share 84,000 = 126000 x 8/12 1 Sept shares (21,000) = -63000 x 4/12 1 Nov share 9,000 = 54000 x 2/12 Total weighted average shares outstanding 872,000

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is Dilutive Antidilutive a. yes yes b. yes no c. no. yes d. no no

b. dilutive antidilutive yes no

In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price. a. true b. false

b. false

When stock dividends or stock splits occur, companies must restate the shares outstanding after the stock dividend or split, in order to compute the weighted-average number of shares. a. true b. false

b. false

[Diluted EPS, Convertible Bonds + Convertible Preferred Stocks]Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2021. The preferred stock is convertible into 40,000 shares of common stock. During 2021, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2021 was $600,000 and the income tax rate was 30%.Diluted earnings per share for 2021 is (rounded to the nearest penny) a. $2.08 b. $2.12 c. $2.29 d. $2.50

c. $2.29 =(600000 - (20000 x 3) + 52,500) / (200000 + 45,000) = 592,500/245,000 =2.42 = (592,500 + 60,000)/(245,000 + 40,000) = 2.29

[Basic EPS]Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2020. During 2021, no additional common stock was issued. On January 1, 2021, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2021, Fultz declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2021, was $960,000. What should be Fultz's 2021Basic earnings per common share, rounded to the nearest penny? a. $1.15 b. $2.10 c. $2.70 d. $3.20

c. $2.70 960000-150000/300000 = $2.70

[Diluted EPS, Convertible Bonds]Shipley Corporation had net income for the year of $720,000 and a weighted average number of common shares outstanding during the period of 250,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par $3,000,000, carry a 7% interest rate, and are convertible into 50,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are a. $1.98 b. $2.68 c. $2.82 d. $3.10

c. $2.82. ?

The following information is available for Barone Corporation: January 1, 2021Shares outstanding4,000,000 April 1, 2021Shares issued640,000 July 1, 2021Treasury shares purchased240,000 October 1, 2021Shares issued in a 100% stock dividend4,400,000 The number of shares to be used in computing earnings per common share for 2021 is a. 9,041,600 b. 8,760,000 c. 8,720,000 d. 5,460,000

c. 8,720,000 Jan 1,21 shares outstanding 4,000,000 April 1, 21 shares issued 640,000 July 1, 21 treasury shares purchased 240,000 Oct 1, 21 shares issued in a 100% stock dividend 4,400,000 Date Increase Outstanding Month. amount Jan 1 4000000. 3 24000000 apr 1 640000 4640000. 3 27840000 july 1 -240000 4400000 3 13200000 Oct 1 8800000 13200000 3 39600000 total 12 104640000 weighted average number of shares (104640000/12) = 8720000

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? a. decrease and no effect b. increase and no effect c. decrease and increase d. increase and decrease

c. decrease and increase

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure? a. common stock, preferred stock, and convertible securities outstanding in lots of even thousands b. earnings derived from one primary line of business c. ownership interest consisting solely of common stock d. ownership interest not consisting solely of common stock

c. ownership interest consisting solely of common stock

[Basic EPS, Convertible Bonds + Convertible Preferred Stocks]Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2021. The preferred stock is convertible into 40,000 shares of common stock. During 2021, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2021 was $600,000 and the income tax rate was 30%.Basic earnings per share for 2021 is (rounded to the nearest penny) a. $2.20 b. $2.42 c. $2.50 d. $2.70

d. $2.70 EPS = net income after tax - preferred dividend/ # of equity shares outstanding 600000-(20000 X $3)/ 200000 = 2.7

Terry Corporation had 800,000 shares of common stock outstanding at December 31, 2021. In addition, it had 150,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry's stock at an option price of $37 per share. The average market price of Terry's common stock for 2021 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2021? a. 800,000 b. 852,703 c. 911,000 d. 839,000

d. 839,000 ?

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the a. preferred dividends in arrears b. preferred dividends in arrears times (one minus the income tax rate) c. annual preferred dividend times (one minus the income tax rate) d. annual preferred dividend

d. annual preferred dividend

When computing diluted earnings per share, convertible bonds are a. ignored b. assumed converted whether they are dilutive or antidilutive c. assumed converted only if they are antidilutive d. assumed converted only if they are dilutive

d. assumed converted only if they are dilutive

In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would a. fairly present diluted earnings per share on a prospective basis b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis c. reflect the excess of the number of shares assumed issued over the number of shared assumed reacquired as the potential dilution of earnings per share d. be antidilutive

d. be antidilutive